Summary List Placement
It’s easy enough to contribute to a 401(k) or 403(b) plan. But getting your money back out of these workplace retirement accounts can be more difficult. Unless you’re at least 59½ years old, it usually triggers taxes and penalties.
But those who have reached the age of 55 have a special option to access their funds penalty-free. This “rule of 55” could save serious money if you want to retire early or need to make a one-time withdrawal from your plan to cover a major expense.
What is the rule of 55?
To discourage the use of retirement plan funds for non-retirement expenses, the IRS normally doesn’t allow you to withdraw from your 401(k) early — “early” being defined as before age 59½.
If you do, you’re dinged with income taxes — an automatic 20% of the amount you take out — plus an additional 10% tax penalty.
But the IRS makes an exception for the middle-aged. It spares you the 10% penalty if you have parted ways with your employer and are over 55 years old. If you’re a public safety worker (police or corrections officer, fire fighter, EMS responder), you can be as young as 50.
The rule of 55, as it’s colloquially known, can apply whether you quit your job voluntarily or are fired. But the departure must happen after you reach the appropriate age. So if you retired at age 54, you wouldn’t be eligible for the rule of 55, even after your 55th birthday.
Bear in mind that the rule of 55 does not remove your income tax obligations on your 401(k) withdrawals — only the 10% penalty. With a traditional 401(k), that means you owe tax on any amount you take out. With a Roth 401(k), that …read more
Source:: Business Insider